The economy is booming right now, and that’s great for businesses. The US economy has grown for more than 120 consecutive months following the Great Recession, marking the longest economic expansion in American history. The job market is growing, unemployment is at record lows, and interest rates are also close to record lows – offering businesses cheap access to funding. On the flipside, the US-China trade war is dragging on and there are increasing fears of a global recession.
Whatever happens in 2020, be prepared!
1. Make a 2020 Budget
The first thing to do when planning your business finances for a new year is: make a budget. There are lots of tools and methods you can use for creating a budget, but at its most basic it should be divided into projected income and projected expenses. If you’re a new business owner, try talking to other people with similar businesses to get a feel for how much you can earn in year one.
You should always plan for unexpected costs. To paraphrase former US Defence Secretary Donald Rumsfeld, these are the ‘known unknowns’: things you know can happen but won’t know if they do happen until, well, they happen. This could include anything from a small expense like replacing a broken computer to a major one like being kicked out of your office space.
2. Shore up Your Emergency Fund
Speaking of unexpected events, one way of protecting yourself is to have an emergency fund. Your first layer of protection is insurance. Depending on your level of coverage, your insurer may cover you for damage to property damage, loss of equipment, whatever else your policy covers. However, some emergencies may not be covered, and, even when you are covered, it can take time to file a claim.
Your emergency fund is something you can access right away, no matter the type of emergency. It allows you to keep operating, even if you don’t have instant access to other funds. Fallen victim to a cyber attack? Waiting for some overdue invoices to be paid? Been offered the chance to buy out a competitor on the cheap? The need for cold hard cash can arise in the most unexpected ways.
Business guru Dave Ramsey recommends treating your retained earnings, the net income left in your business after it has paid out dividends to shareholders, as your emergency fund. He suggests retaining enough to cover six months of operating expenses, noting, “that’s a lot of cash, but you’re your own credit line, too.”
3. Apply for Affordable Financing
Realistically, your business probably needs some form of financing outside of its own cash flow to be able to grow. The problem is, many businesses wait until they are in an unfavorable position to go cap in hand to the bank.
Whether you’re in the market for a business term loan, line of credit, accounts payable loan, or any other form of business financing, lenders will assess your business with a fine-tooth comb. Typical qualifying requirements for a business loan include: time in business, gross monthly revenue, and credit score.
The best time to approach lenders is when you’re in a position of strength. If your key indicators are good heading into 2020, then this is the time to apply for funding.
4. Automate What You Can
Automation used to be something big businesses did, but this is no longer the case. These days, there are many types of automation tools that are affordable enough for small business to use.
Taking care of your business finances can be incredibly time-consuming. If you’re fortunate enough to have employees, that brings with it all sorts of things, like payroll and taxation, that can be a real drain on your resources. Thankfully, there are payroll software programs and services to help you take care of these things.
When it comes to the best business payroll services, it’s important to note that payroll software is something you can use to automate payroll processes. It integrates with other programs, syncing data into your payroll so that you don’t have waste energy tracking down information or cross-referencing time sheets. A payroll service is an external company that handles all your payroll, saving you the cost of employing someone to the job internally. Both options can save you time and money.
5. Stay Alert to the Economy
However focused on your business you may be, never lose sight of the world around you. When big macroeconomic events occur, businesses are invariably among the first to feel the impact. When the economy is going well, business is good. But when it’s not, hold tight.
Brian Moran, CEO, Small Business Edge, says losing his small business in the Great Recession has helped him prepare for the next recession. Moran lists 5 ways to get your business ready for when the next recession hits:
- Watch for red flags, e.g. slow-paying receivables, tightening credit lines, or something happening upstream within your supply chains.
- Stay on top of your receivables, otherwise you run the risk of not having enough cash on hand when disaster strikes.
- Develop alternative revenue streams built around what your customers might need if there’s a downturn in the economy.
- Review your contracts and agreements, so that you’re not stuck with a 10-year lease on new office space when recession hits.
- Look at every segment of your businesses and ask “What if?” For example: What if a recession hits our business? What if the bank pulls out line of credit? What if our largest customer goes out of business and takes our receivables with them?
Your Finances Are the Heart of Your Business
The main reason businesses fail is because of inadequate cash reserves or poor cash flow management. Either way, your finances are the beating heart of your business. If you fail to properly manage your finances, this can pose a mortal danger to your company. If you have your finances well-organized, then you can feel confident to meet any challenge.